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Slight rise in Real Estate Bubble Index despite improving economy

Zurich/Basel
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07 Nov 2013, 08:00
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Media Releases Switzerland

The UBS Swiss Real Estate Bubble Index has increased slightly to 1.20. Residential real estate prices and mortgage debt continued to grow more strongly than economic output and household incomes. The number of risk regions remained unchanged, although a trend reversal is becoming apparent in the Lake Geneva region.

Zurich/Basel, 7 November 2013 – The UBS Swiss Real Estate Bubble Index is up slightly by 0.05 index points to 1.20 (time series revised), and thus staying within the risk zone in the third quarter of 2013. Although economic growth in the last quarter was higher than in the previous quarter, it was unable to keep pace with the price and debt momentum on the residential real estate market. The risks have thus risen further.

The continued rise in the index in the third quarter of 2013 was driven by price growth in residential property, running at a still high level of 4.2% year-on-year in real terms. Since asking rents in the same period only increased by 3.3%, the price gap between owner-occupied and rented properties widened. Demand for condominiums as investment properties nevertheless remained at a sustained high level. The number of loan applications received by UBS for properties not directly used by their owners rose to 22.1% of the total – almost on a par with the all-time high of 22.3% in the fourth quarter of 2012.

The strong economic growth of 2.5% and the accompanying growth in incomes have nonetheless put the price trend into perspective to some extent. This year, the longest period of deflation since the global economic crisis in 1929 will also come to an end. The annual rate of inflation for domestic goods rose within a few months to 0.7% in September 2013 from 0%. The stronger growth momentum in combination with higher inflation rates could normalize valuations on the real estate market throughout Switzerland without a major price correction.

With the high valuation level at present, however, it will not take much for the risk of a real estate bubble to become acute again. Imbalances will continue to increase as long as prices for residential property continue to rise by more than 3% a year, after adjustment for inflation. And while mortgage debt growth is practically unchanged, the risk for the economy is also increasing. Only significantly higher mortgage interest rates are likely to put an end to this high-risk trend.

Regional risks remained unchanged in the third quarter of 2013. A trend reversal is nevertheless becoming apparent in the risk regions on Lake Geneva. The region is the only major urban center to see stagnating or declining prices for residential property in practically all segments. Due to the valuations in the Lake Geneva region, which are high relative to other risk regions, the potential for correction is still high.

UBS Swiss Real Estate Bubble Index – 3Q 2013

MethodologyDepending on its current value, the index falls into one of the following risk categories: slump, balance, boom, risk and bubble. These categories are specifically defined and ranked in order of risk. The UBS Swiss Real Estate Bubble Index comprises six sub-indices that track: the relationship between purchase and rental prices, the relationship between house prices and household income, the development of house prices relative to inflation, the relationship between mortgage debt and income, the relationship between construction and gross domestic product (GDP), and the ratio of loan applications filed for intended rental properties to total loan applications filed by UBS private clients.

Selecting exposed and monitoring regionsOur selection of exposed regions is tied to the level of the UBS Swiss Real Estate Bubble Index and is based on a multi-level selection process utilizing regional population and property price data.